I received this email this morning.

[Leon Yew6 May 2016 at 10:33

Another piece well written. However, I am more interested on your view in ECS ICT which you recommend in the beginning of this year. FYI, the latest quarterly report release showed huge decline in net profit and operation cash flow had turn negative. What is the action taken when the company that we analysis post a bad quarter report as ECS? Should we sell directly or wait for a full year Audited Account to make decision?]

At the beginning of this year, I gave an exercise on discount free cash flows analysis to my course participants using ECSICT while we were learning about discounted cash flow analysis. All those who did the exercise using reasonable assumptions of future free cash flows (FCF) for the last few years as the base, and a conservative discount rate. Almost all of them came up with an intrinsic value of ECS and with a high margin of safety compared with its price then of about RM1.50.

Here is another analysis done by me published in i3investor as shown in the link below:

http://klse.i3investor.com/blogs/kcchongnz/90900.jsp

Why should investors get panic when a quarterly report shows a drop of earnings of just 2.4 sen a share in the latest quarterly result released yesterday when compared to the corresponding quarter of a high profit due to the good sale just before the implementation of GST?

As for the poor cash flow because of the high inventories for this quarter, you should have known that cash flows are always lumpy, even annually. So negative cash flow for a single quarter doesn’t really tell you anything useful.

Fundamental investors view investing in a share as akin to investing in part of a business. You may ignore what I am going to say if you are investing in shares by looking at different things and from different angles.

In his seminal work first published in 1938, The Theory of Investment Value, John Burr Williams postulated, “…we shall see fit to define Investment Value, therefore, as the present worth of the future dividends in the case of a stock, or the future coupons and principal in the case of a bond.” 

In the investment profession, it is commonly agreed that as companies generally do not distribute all their free cash flows as dividend, and growing companies retain a major portion of FCF for investments, FCF is generally used to replace dividends.

Again, you do not have to follow what John William, who has great influence on most of the super investors in the US and the world, said about the value of a firm is the discounted all future cash flows to the present, you do not have to agree with him.

ECSICT earned 18 sen a share last year. If you are a fundamental investor, do you see that the value of the company has been devastated by the reduced earnings in a quarter by just 2.4 sen?

For me, I don’t think so, not unless you can see the stiff competition has suddenly creeped in that the business of the company is going to deteriorate badly in the future. By reading through the management discussion of the quarterly report, there does not seem to have any sign that it will, in my opinion. The population in Malaysia is always going up. People will continue to buy desk top, laptops, smart phones. if they don’t buy this quarter, they may buy the next. May be more people will start to buy those new technology stuff such as wearables the next quarter?

At a price of RM1.55 now, and a cash holding (with zero debt) of 65 sen a share, I don’t see a hurry to dump the shares just because it made 2.4 sen for the last quarter.

Remember I always emphasize buying good things at cheap price with a high margin of safety? If you have done that, you seldom have to worry too much.

Hence I kind of agree with the comment of this person.

[Posted by Henry Tan > May 5, 2016 11:27 PM | Report Abuse

By the way kc, today ECS quarter report shows that it is 45% drop in profit YoY. Do you think it is good time to accumulate more if there is panic sell tomorrow? ]

I know I know, others have told you buy when this quarter shows better result than before, and sell if the result is worse. You may follow them.

But this principle of trying to buy low and sell high has been deeply entrenched into me. I don’t fancy the buy high and hope to sell higher, and the frequent cut loss principle. I am just different and I am bad at that.

Oh almost forgot. I have just posted an article on “The power of mean reversion in investing” a couple of days ago in i3investor.

http://klse.i3investor.com/blogs/kcchongnz/95848.jsp

Again if you wish to learn how to value a business, feel free to contact me at

ckc15training2@gmail.com

K C Chong